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Interview with “The Behavior Gap” Author, Carl Richards

If a picture is worth a thousand words, Carl Richards’s napkin sketches are worth a thousand bucks. His minimalist Sharpie art is designed to weasel its way into your brain so that the next time you think, “I should buy that hot stock,” you’ll remember his famous “buy high/sell low” drawing and wait until the must-buy feeling passes.

That sketch appears on the cover of Richards’s new book, The Behavior Gap. The book is short, jargon-free, and loaded with napkin sketches and advice to inoculate you against all sorts of emotion-driven money mistakes.

Going on a media fast

Mint: What are the three stocks I should buy right now?

Richards: Classic. That’s a different book.

Mint: You wrote a whole personal finance book that doesn’t mention the word “401(k)” once, doesn’t mention any specific mutual fund, and doesn’t get down into any real nitty-gritty financial advice. Why did you do it that way?

Richards: I’ve joked from the beginning that my goal was to write a personal finance book for people who would never read a personal finance book. This idea of being prescriptive just hasn’t worked very well. A lot of personal finance books are really specific and really prescriptive, but the problems are as unique as the individual. So, a lot of educated folks have gotten sick of these prescriptive books.

Mint: I’ve increasingly had people email me and say they’re worried about a doomsday scenario: “I’m just scared of everything, that all of my money is going to disappear into a black hole because of something I’m hearing about in the news.” How do you talk someone down from that place?

Richards: We tend to think that today is the worst it’s ever been. I don’t have any memory of the Cuban Missile Crisis, but I have a friend who told me he can remember his dad packing them up to go home early from a vacation in tears because he thought the whole world was going to pot. If you go back and look, historically, we’re going to continue to create apocalypse du jour every single year.

One of the suggestions I make in the book is to go on a media fast, and just stop paying attention to those things that make you feel negative. I was at a lacrosse game, and my sweet mother came and sat down next to me to watch my 10-year-old son play lacrosse. She was really depressed and I said, “What’s wrong, Mom?” And she said, “The dollar.” And I was like, “What did you just say?” I was speechless. She said, “The dollar is just being devalued, and it’s going to collapse.”

I said, “Mom, I’ve been doing this fifteen years, and I don’t even know what that means. Where did you hear that?” “It’s all over the news.” Well, let’s analyze that quickly. What would it mean? Is it really going to happen? There’s one sketch in the book that says, “Things you can control” and “things that matter,” and the overlap is what you should focus on.

Good moves and bad moves

Mint: In the book, you say a bad decision is a bad decision, even if the outcome is okay. Let’s take one popular bad idea: Investing in your employer’s stock. Say you have a client who who has a lot of money in company stock, and they’re loyal to their employer, and the stock has done well. You’re in the position of having to tell them this is a bad idea. How do you do that?

Richards: Let’s say that you’re right and your employer’s stock doubles again. I’m thinking of somebody close to retirement, with a million dollars in their retirement account, and you want to get really aggressive with it. Let’s say that you happen to hit a home run and your account is worth $1.5 million a couple years later. What impact would that have on your life? And then ask the opposite question: What happens if you’re wrong? There re plenty of examples. You could have just as easily had Enron or Tyco, as you could have Apple or Google. And let’s say that your account’s worth half or less. What people find is, the consequence of being wrong has a far greater impact on your life than the chance that you might be right.

Risky business

Mint: Everyone says you should invest according to your risk tolerance, but measuring your own risk tolerance is notoriously difficult. The title of your book refers to the fact that people load up on the hot investment once it’s already overpriced and then sell it after it crashes. How do you figure out what investment approach is going to help someone achieve their goals and let them sleep at night?

Richards: I think you’re constantly trying to balance this idea that you should always have as much in equity exposure as you can emotionally handle — that’s one way to make that decision. And the other way is to have only as much in equity exposure as you need to meet your goals. I think the second way is better. That implies that you have some sort of plan, and that you’ve taken the time to think about your goals, map out a course to meet them and to hire somebody that you trust to help you with that process if you need to.

You may get to the end of that process and decide that you need to take a lot of risk; you need the return that you can only get if you have a high exposure to equities, such as 90% equities. If you are totally uncomfortable with that, then there are other levers. You can say, “Maybe I can save a little bit more, maybe I can find a part-time job in retirement for five years, or maybe I can retire a little later.”

Mint: At what point is it okay to go back and make a change? You don’t want to change your allocation all the time, willy-nilly, and be the person on the cover of your book. On the other hand, sometimes you genuinely realize that your risk tolerance isn’t what you thought it was. How often is it okay to reconsider that, and under what circumstances?

Richards: The cool thing about investing is, if you’ve been investing for 10 or 12 years in your 401(k), then you have enough experience now to know how you’ll behave in certain situations. You can go back and look because you have actual data. Go pull up your tax returns, your 401(k) statements, and your brokerage statements. You can see what you did. So, if you found yourself buying in 1999 because you just couldn’t stand the fact that Cisco was doubling every year, if you found yourself selling in 2002, if you found yourself feeling like you were a professional real estate investor in ‘06 and ’07, and then bailing out in March of ’09, that’s information. At this point, it should be pretty clear that you can’t stand the heat, and you should incorporate that information into your planning.

For many people, ’08-’09 may have been, “Wow! That’s what risk really feels like.” Well, that information should be incorporated into your allocation decision. I don’t think there’s anything wrong with using the feedback we’ve gotten and making changes. I just think often it’s the knee-jerk way in which we make those changes that causes the problem.

Mint: I worry about what’s going to happen when 2008-09 rolls off those 5-year performance charts you always see when you punch in a ticker symbol. It’s a really easy way to show people how much risk could show up for a particular investment.

Richards: Record your feelings about these things. Write them down. Write yourself a little letter and review that once in a while. Because you’re right: We’re going to forget. I had hoped that ’08-’09 was going to be permanently seared in our memories, and we’re already forgetting.

Mint: I hoped 2001-02 was going to be permanently seared in our memories.

Richards: Yeah, me too.

Carried away in the housing boom — and bust

Mint: I read your piece in the New York Times about losing your house. You admitted to some pretty egregious mistakes. What did you learn in the aftermath of publishing that?

Richards: I got hundreds of emails. Most of the emails were these sad stories from people who just felt alone. If we’re going to change the way we approach these decisions in this country, then we’re going to have to figure out (I’m not trying to be overly dramatic here) how to change this conversation. I’m not saying we need to be more permissive, but we need to talk about money more. How are we ever going to learn anything if when we’re trying to make these decisions, we make them in secret, like I did? I didn’t have anybody helping me. Now, I know, I’m a financial planner, I should have been helping myself, but that’s not the way these decisions work. You are too close to them to make objective decisions.

We hired a financial planner about six months ago, when we finally got moved, we got at least a little bit of footing underneath us. I am 100% convinced I would not have made those mistakes if that person had been in my life five years earlier.

Mint: What was that experience like for you as a financial planner, hiring a financial planner? Was it a weird conversation?

Richards: Of course! It was terribly embarrassing.

Mint: I know, for me, the day when I convince myself that I know enough about personal finance that I’m never going to make a dumb money mistake, is the day before I make a huge money mistake.

Richards: Totally. There’s a huge movement in the financial community: The big debate about whether every planner should hire their own planner. I’ve told the Financial Planning Association that I think they should make it a requirement. I think this should be a professional standard. In fact, to me, that may be the single most valuable question a consumer could ask of a financial planner. When you go hire a financial planner or a financial advisor, ask them if they have their own. Then ask, “Do you pay them, like I’m going to pay you?”

Getting creative

Mint: When did you start doing the sketches?

Richards: I think that behavior gap sketch was the first sketch that I drew in front of clients. I had done it so many times that I was finally like, “Wow, maybe this means something.” That sketch probably started happening in the early 2000s.

Mint: So, how did you go from doing these sketches in client meetings to realizing, hey, wait a minute, there’s potential here for these to reach a mass audience?

Richards: Had I started this 20 years earlier, it would have never gone anywhere. I would have drawn this and what would I have done? I would have shown my neighbor, or maybe my mom and dad.

Mint: Make a lot of photocopies.

Richards: They would have been like, “What? That’s silly.” With the internet, you’ve got this massive audience now, and no matter how bad your work is, there’s likely to be at least a few people who enjoy it, and then they’re going to encourage you. So, I think there are two things: 1) Ignore your mother, and I mean that lightheartedly, and 2) Play in traffic. Just get out there and hope you get hit. It happened to me.

Get out there and stick with it. For years I had a blog that only my mom and my sister claimed to read, and I’m pretty sure my sister didn’t. I’m pretty sure she was lying.